The Dynamics of Funding: Considering Reliability and Autonomy

Editors Note: This article presents a framework for assessing an organization’s sources of support based on the reliability and flexibility of decision-making available to the organization. The problems created by low reliability and limited autonomy funding are an obvious and all-encompassing fact of life for nonprofits, but the solutions are not. The “Reliability-Autonomy Matrix” helps staff and board members to understand the complexity of their organization’s revenue streams and their effect on every aspect of the organization’s planning and management.

Every nonprofit organization begins with high hopes and aspirations for public benefit, with a mission to make the world a better place. An immediate challenge is how to put these goals into action, and how to finance the organization. Or, as one cartoon caption under a drawing of Moses holding two large tablets put it, “What about funding?”

Money is a limited and competitive resource; organizations without a permanent source of funds must do their best to accommodate the preferences and conditions of funding sources. Striking necessary bargains with devils and angels constitutes the defining struggle for nonprofit boards and managers. This existential dilemma is played out in every nonprofit budget and strategic plan: how does the organization raise funds to realize its higher purpose, while also scrambling for its continued existence?

The way an organization handles decisions about funding sources sets in motion an ongoing chain of consequences, further decisions and compromises about what the organization will and will not agree to do. Throughout the history of nonprofits, major changes in size, direction and strategy (and even new names and purposes) are more commonly due to shifts in revenue than to purposeful planning.

Among the funders of nonprofit activity, attaching conditions and targeted funding are considered valid methods for increasing the accountability and effectiveness of grantees. Whether it is a government agency or a private foundation, these managers have authority over a finite resource with many requests from the outside. They conclude from previous experience the type of activities most likely to succeed, and seek the “biggest bang for the buck” by focusing and restricting their money to a narrow range of activities.

For nonprofit organizations, not all funding has an equal effect on the bottom line. Complying with the conditions attached to funding–and coping with fluctuations in revenue–imposes direct and indirect costs and occupies the attention of managers and directors. The drawbacks of this situation are self-evident to anyone who has managed a nonprofit organization, but financial reports have the effect of simplifying the problem as “will we take in enough money to cover expenses?”

Board members, nonprofit employees and clients (and even other funders) frequently believe that an organization has more latitude with when and how it spends its funds than it does. This places nonprofit managers in the onerous position of enforcing and defending compliance with funding conditions, sometimes in the face of solid arguments for an alternative course–all the while being criticized that “if they wanted to do it, they could.” Or worse still, different parts of the organization disagree about the existence of conditions, the wisdom of compliance, or the likelihood and severity of sanctions, causing internal conflict or even misappropriation.

An organization-wide appreciation of these revenue source issues is in the interest of the board and staff, informed by an examination of the two major variables: reliability and autonomy.

Reliability of Funding
To what extent can an organization predict its revenues year to year for budgeting, staffing and program planning? Is it reasonable to expect a particular funding source will be renewed? This information–projecting and tracking revenue and expenses–is key to managing any enterprise. Boards and nonprofit managers need to exercise their best judgment of what revenue will be available, with serious consequences if they are wrong; the decisions they make will be based on their confidence level regarding the relative stability or volatility of the organization’s support.

The matrix divides twelve common types of nonprofit funding into three levels of reliability: high, medium and low. This necessarily gross categorization is useful to clarify between dependable and speculative sources, though individual organization’s experiences will vary. The placement of a funding source on the reliability axis can be very different based on the organization’s relationships, existing commitments, and other constraints influencing the funding source.

Organizational Autonomy
Dependency theory indicates that the autonomy of nonprofit organizations is directly related to the extent of their reliance on suppliers of funds.

From government contracts to foundation grants, a variety of conditions are attached to funding comparable to “If you take the King’s shilling you do the King’s bidding.” These conditions can range from general targeting of an activity to extremely detailed specifications dictating the ingredients, personnel, time, place and manner of activity. For the donor these conditions represent due diligence assurances that funds will be effectively and responsibly expended, while the recipient organization may feel that some conditions are unwelcome, burdensome and counterproductive.

As with the reliability index, the matrix divides twelve common types of nonprofit funding into three levels of autonomy: high, medium and low. This similarly gross categorization is distinguishes between conditional and unconditional sources, and individual organization’s situation will vary. The location of a funding source on the autonomy axis can be adjusted based on the organization’s relationships, existing commitments, and other constraints influencing the funding source.

Low autonomy: Third party reimbursements, government project grants, ongoing government contracts, foundation project grants, United Way support.

Computing your Reliability-Autonomy score
Use the companion worksheet to compute your score. Organizations should feel free to change the rating for a funding type based on a frank assessment of their own situation and relationships.

Management and Governance Implications
The reliability–autonomy matrix helps reveal priority issues for board and management attention and indicates strategies needed to handle the relative reliability and independence of its money. The scores themselves are difficult to shift, such as to dramatically increase autonomy, since most mature organizations have an established mix of funding. Wherever a funding source falls within the matrix, it has a variety of management options, many of which increase the complexity of the management task.

One critical additional variable is the sheer number of funding sources. Most organizations work hard to diversify their sources of funding, both in type and number of sources, to reduce its volatility and risk of catastrophic loss (such as when a major funding source withdraws its support).

Boards of directors expect to be involved in budget planning and monitoring, but are often not aware of the degree of volatility of their funding, or what the organization should do about it.

Organizations low in reliability have a variety of possible actions to reduce the uncertainty in their environment:

Use of volunteers, consultants and temporary employees to increase flexibility of the workforce, reducing dislocation.

Develop close relationships with organizations in the same subject area to track industry changes, share information on funding source preferences and behavior.

Submit multiple applications to offset low response rates.

Organizations low in autonomy have a special set of problems, since funding sources are definitely willing to transfer funds to them, but want to do this in a particular way. An African proverb says that if you want to give a man a goat you have to let go of the rope, but of course many funders have perfectly good reasons why they can’t completely let go of the rope.

Boards of directors are less aware of their role in monitoring the restrictions placed on the funds their organization receive. Low autonomy organizations also have a special set of skills needed to preserve sufficient maneuvering room:

The board needs to monitor the consonance between the organizations mission and the nature of projects it is asked to undertake.

The organization needs to be prepared to resist and reject incompatible conditions by having a gift and grant acceptance policy.

Maintain a robust financial system to track and comply with conditions and restrictions on funding and effective segregation of funds. Monitor conditions on funding. Discuss as a board the purpose and contract monitoring.

Increase the total number of funding sources, even if they are low autonomy, to reduce the degree of control of any one source. An organization with a dozen or more low autonomy funding sources can mitigate the lack of flexibility by modulating.

Take part in policy networks and coalitions to resist or reduce excessive conditions by government funding sources.

The easiest type of organization to manage, and one of the most satisfying for a board experience, is a high reliability/high autonomy organization. These organizations can chart their own course and stay flexible, and have the time and freedom to ask the big questions and make long term plans. High reliability/low autonomy organizations are often large institutions enjoying tight relationships with government or the United Way, and often have long-term relationships in which funding conditions are accommodated over a long period of time.

The most difficult organizations of all to manage are low reliability/low autonomy (a.k.a., Dante’s Seventh Circle of Hell). These organizations are stuck in an ongoing loop of project creation, submission and approval, and have a high need for both negotiation and earnings management, which sometimes are in conflict.

Many organizations are so steeped in their existing funding patterns and relationships that they no longer recognize the nature and limits of their situation. The matrix provides a different slant on an organization’s revenues for boards and nonprofit managers, and serves as a useful backdrop for strategic and financial planning.

Editor’s Note
The usefulness of the Reliability-Autonomy Matrix is not that it can be easily changed (which it cannot), but its potential to broaden awareness of funding limitations within an organization and to identify potential strategic responses.

For a quick method to analyze and score the organization’s revenue reliability and autonomy, select “Reliability-Autonomy Score” to download an Excel spreadsheet template.

About the Author
Jon Pratt is the executive director of the Minnesota Council of Nonprofits and a contributing editor to the Nonprofit Quarterly.